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Sunday, June 22, 2008

Basics of e-Procurement

The term e-Procurement is used for referring the procurement processes using internet technology. E-Procurement helps to reduce the transactional costs, achieving faster & automated transactions, helps the buyer to focus more on strategic part of procurement.

1. Benefits
Below are the advantages of e-procurement over manual procurement

1.1. Improved Process efficiencies


Manual procurement is labour intensive and time consuming process. Switching to e-procurement helps companies to reduce employees’ cost, paper and redundancy and cycle times. Time saved of employee in procurement can be utilized in more productive work. Similarly reduction in procurement lead lime helps in reducing inventory levels. It is estimated that that switching manual procurement to e-procurement can reduce procurement processing cost by 80%

1.2. Reduction in errors

Manual processes are always prone to errors. In manual processes as and when the information is transferred at many occasions it is re-written or re-typed at various stages. Since many people are involved in various stages of procurement approval processes. This can further increase the chances of errors at multiple data entry points
In case of e-procurement data is transferred automatically with inbuilt securities.

1.3. Better compliance

Non compliance or maverick spending occurs when goods and services are procured from the suppliers, who are not evaluated or selected by procurement department. This is also called off-contract buying as procurement happens outside the existing contracts.
E-Procurement systems facilitate purchasing from the preferred suppliers thereby reducing the non-compliance and maverick spend. Reduction in maverick buying in turn leads to lower transaction costs and greater leverage and pricing discounts with approved suppliers.

1.4. Enhanced Leverage

A good e-procurement system helps the buyer to source the material strategically by leveraging the spend by consolidation. Consolidation can be consolidation of orders of or the quantities of categories from around the company to get the leverage with the supplier. Additionally e-procurement reduces off-contract buying by enforcing contracts thereby increasing the leverage of spend.

1.5. Improved Sourcing

In manual procurement, it becomes difficult to search and select a supplier for an MRO material or specialized direct material in the supplier base. E-Procurement system helps the buyer to search the supplier from supplier base or through online.

2. E-Procurement Tools:

There is wide range of e-procurement models in use. Let us gain a understanding of the major types of e-procurement transactions and tools, and for this purpose e-procurement model can be divided into a numbers of different types.

Some of these are as under

E-Catalogues
Internet Trading Exchange or e-marketplaces
Reverse Auctions

RFX Model (RFP, RFQ,RFI, e-Tendering)
Self Service Procurement
Purchase Cards

Supplier Portal

2.1 E-Catalogues

In normal case of business scenario, supplier visits end users and buyers and provide their product information through Product catalogues. These catalogues normally contain product specifications, rates, validity of rates, discounts, minimum order quantity etc. In the context of e-procurement, these catalogues are available in electronic formats.

There are three ways to maintain the catalogues.

2.1.1 Buyer Hosted Catalogues: Supplier provides the catalogues to buyer in electronic format or the supplier accesses the system of buyer and uploads the catalogue

2.1.2. Supplier Hosted Catalogue: In this case supplier hosts catalogue on his website buyers visit the website of suppliers and browse the catalogues.

2.1.3. Third Party Hosted: In this case suppliers maintain their catalogues by accessing third party web site and buyers access the third party system to browse the catalogues.

2.2. Internet Trading Exchange or e-marketplaces


This is the single point entry meeting place for buyers and suppliers. Here buyers post their requirements and suppliers can quote against the requirements posted by the buyers. Features of a e-marketplace can vary from plain transactional trading to enabling suppliers and buyers to collaborate in the areas of supply chain planning, product designing & development, knowledge sharing.

The business model for such kind hubs is to charge money from buyers and suppliers based on transactions, volumes etc.

There are two types of E-Market places

Vertical e-Marketplace
Horizontal e-Marketplace


2.2.1 Vertical e-Marketplace:
These market places are very specific to a particular industry such as automotive, textile etc. Such kind of e-marketplaces is supported by one or more major players of the industry. These type of marketplaces cater the requirement of direct and specialized MRO purchases

2.2.2. Horizontal e-market Place
Horizontal trading exchanges focus on general requirements which are common across the industries, such as ORM supplies, general MROs etc. These marketplaces focus on indirect purchase of the industry. The example in this space is Ariba Network

2.3. e-Reverse Auctions

Reverse auctions can be conducted either through an e-marketplace or directly by a buying organization. There are mainly three types of auctions

English Reverse Auctions
Japanese Reverse Auction
Dutch Reverse Auction

2.3.1. English Reverse Auctions
In this type of reverse auction buyer opens the auction with the price of the item and seeks lower bid. Bidders outbid each other by placing lower bids. The auction ends when no body is able to quote lesser than the lowest quote. It is time bound bidding.
The buyer may reserve the price above which he is not willing to pay. In case of winner of the bid is not able to supply the full quantity the buyer can go for second lowed bidder to fulfill the quantity. Sometimes buyer may impose the condition of supplying full quantity in the auction.

2.3.2. Japanese Reverse Auction
In this auction the buyer sets the opening price for the bidders and bidder must declare whether they are “in” the auction for supply of material at the price set buy the buyer. The buyer keeps on reducing the price by an incremental value within a specified time period and bidders declare whether they are still “in”. The auction ends when there is only one bidder is lift “in”.

2.3.3. Dutch Reverse Auction
In Dutch reverse auction, buyer sets an opening minimum price and keeps on increasing by some fixed incremental value. Auction ends immediately when anyone of the bidders is ready to supply the material at that price.
This type of auction is popular in Airline Industry. When the capacity of the aircraft is full and any new passenger comes who require the ticket immediately due to emergency travel, the airline staff starts this auction process in the aircraft and the passenger in the aircraft are the bidders. Buyer starts auction with some price and keeps on increasing this prices after fixed time, the moment any passenger raises his hand is the winner.


2.4. RFx Model (RFP, RFQ, RFI, e-Tendering):

RFQ has long been a traditional way common tool of procurement. If RFQ is prepared manually it is very time consuming process. Now a days RFQs are prepared electronically in ERPs, trading exchanges and e-marketplaces. Use of ERPs and trading exchanges makes possible quick creation and transmission to suppliers.

Now a days there is new focus on Request for Proposal (RFP) and Request for information (RFI). So this area now a days called e-Sourcing or RFx Model.

Meaning of these terms

2.4.1. Request for Quotation RFQ) is a request for supplier to quote for a particular product or service. The buyer sets the requirements and specifications in the document. The supplier has to quote in the prescribed format specified by the buyer. Issuing a RFQ means that buyer may probably (not the guaranty) make a commitment with one of the respondents

2.4.2. Request for Proposal (RFP) is a request by a buyer for supplier for submitting the proposal. RFP asks suppliers to propose how they would meet the buyer’s product or service need. This approach is largely used when the supplier is having greater expertise than buyer.

2.4.3. Request for Information (RFI) implies that there is no commitment from either side. Buyer asks for the information from supplier and evaluate whether they might go for particular service or job with a particular supplier.

2.5. Self Service Procurement: Self service procurement passes on the procurement jobs to end users. Materials procured under self service are normally non strategic, under contract and with fixed pre negotiated prices. Self service procurement frees the buyer from transaction procurement and helps him to focus on strategic procurement.

In self service procurement end user searches the catalogue (Catalogues are pre approved by buyer) and creates the shopping cart or purchase requisitions. These shopping carts/purchase requisitions are forwarded to supervisor of the end user automatically for approval based on work flow. Shopping carts/PR gets converted into an approved electronic PO automatically after the approval of Shopping Cart/PR. PO is also delivered to supplier automatically i.e. no intervention and no role of procurement staff in placing the orders!


2.6. Purchase Cards

To know about Purchase Cards click here

2.7. Supplier Portal: Supplier portal extends the organisational boundaries to suppliers. Here suppliers after loging into the system can download purchase orders, acknowledge the POs, quote against tenders and RFQ, participate in auction bidding, view the status of goods delivery , rejections/acceptanc, payments, inventory etc.

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  1. E-procurement can streamline this entire process based on your business rules and allow the requester to track their Purchase requisition every step of the way. This in turn, will eliminate the in-efficiencies and wasted effort currently happening in today's paper based environment.

    When implementing e-procurement software, approval process mapping is key to re-evaluating your departmental approval processes. Mapping them out for the department manager to visualize will help them determine if these rules make sense, given the current structure and policies.

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